Educational Articles

Using the Value Line Page: Bank of America August 19, 2010

Reuben Gregg Brewer
| August 20, 2010

One of the benefits of a Value Line research report is that it can help you decide what stocks to buy. But buying isn’t the only activity in which investors engage. All along the path of ownership there are decisions to be made. Value Line’s easy-to-use one-page reports can help throughout the process of deciding if something is worth buying, holding, or selling. With a low Timeliness Rank, and a host of other issues, Bank of America (BAC – Free Analyst Report) isn’t the best option in the banking space, and the Value Line page can help you see why.

At the top left of each Value Line report (you can download a free copy of Bank of America’s report here for use in conjunction with this article), the name of each company appears, we call this the Top Label. Directly below the name is the Value Line Timeliness Rank. The system goes from 1 to 5, with 1 the highest possible score and 5 the lowest. Bank of America’s Timeliness Rank is 4, which is below average. As such, we expect the company to lag the market over the next 6 to 12 months.

That in and of itself is enough for some investors to stop looking and try to find another investment opportunity. It is undeniable, however, that investor sentiment can often push good companies down and make them long-term bargains and turnaround plays. So, for the more intrepid, a further look at Bank of America makes sense. Catty-corner to the Ranks Box on the top left of each page is the Ratings Box, which lives at the bottom right of the page. Here you can see that the banking giant has a relatively solid Financial Strength rating of B+. That’s not great, but it’s not bad, either. However, the scores for Price Stability, Price Growth Persistence, and Earnings Predictability are all well below average. It’s not a good sign for all of these scores to be at the low-end of the range (for these measures, 100 is the Highest possible score and 5 the Lowest).

Clearly, the recession and banking meltdown had a major impact on Bank of America’s fortunes. Indeed, as the historical data in the Array at the heart of the page show, prior to 2008, the bank was a steady performer with both generally rising earnings and a steadily increasing dividend. That said, the world changed for this company in 2008. Not only did earnings falter, but the first of two dividend cuts took place.

Taking a look at the Quarterly Dividend box on the bottom left of the page gives more detail. Management maintained the dividend until the fourth quarter of 2008, when it cut the payment in half. As the financial crisis deepened rapidly, however, the payout was cut again in the first quarter of 2009 to one cent a share per quarter—a purely symbolic payout that allows institutional investors with a dividend mandate to continue investing in Bank of America shares. The dividend remains at this virtually meaningless level. Granted, many banks cut their dividends in this period of time, but not all did. Regardless of Bank of America’s status as a too big to fail entity, it can no longer be said that the shares are “invest and forget”, particularly if one needs dividend income to survive. And while the estimates in the Array show that the dividend may inch back up to the $0.40-a-year range by the middle of this decade, that’s a far cry from the $2.40 that was being paid before the financial crisis.

On the earnings front, the Quarterly Earnings box on the lower left of the page clearly shows that the trouble started in late 2007. It also highlights the volatile quarterly results since that time. And while the bottom line appears to be strengthening, Value Line Analyst Theresa Brophy points out in the Analyst Commentary section that recent results may not be as solid as they seem because accounting issues lent a good deal of support to the recent quarter’s earnings. Sure there were some positives, but the underlying negatives need to be remembered and watched for those who own the shares or are considering an investment.

On the topic of volatility, Bank of America has another knock against it on this front. While it garners a Safety Rank of 3, which is average, the beta (found at the bottom of the Ranks Box) is 1.85—an extremely elevated level for any company, let alone a bank. A beta of 1.85 suggests that the stock will move 1.85 times any move in the broader market. If there’s a selloff, Bank of America stock is likely to get hit particularly hard.

Another issue to consider is valuation. As the Top Label shows, just to the right of the company’s name, Bank of America’s current price to earnings ratio is around 15 and its P/E relative to the market is hovering around 1.00 (on par with the market’s P/E). This may not seem out of line until you compare that to the company’s valuation levels historically. Indeed, since 1994, the company’s average annual P/E has more commonly been in the low teens to high single digits—15 is at the higher end of the range. Moreover, the relative P/E has typically been in the 0.50 to 0.70 range, the current level of 0.97 is unusually high.

In the end, Bank of America stock isn’t appropriate for conservative investors. Venturesome investors may find the current price an interesting entry point, but any turnaround is likely to take a good deal of time to materialize and it’s likely to be accompanied by a fair amount of share price volatility.